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Chapter 10. Mortgage Default and Claims

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Chapter 10. Mortgage Default and Claims CHAPTER 10. MORTGAGE DEFAULT AND CLAIMS 10-1 ORGANIZATIONAL RESPONSIBILITIES. HFAs are responsible for filing Notices of Default and Reinstatements, claims for insurance benefits including Partial Payment of Claim (PPC), issuing debentures, paying annual accrued interest on debentures, retiring bonds, returning excess funds to Headquarters and submitting to Headquarters HUD's share of repayments. The Multifamily Insurance Operations Division, in Headquarters, is responsible for monitoring defaults, granting extensions for filing an initial claim, accepting PPCS, accepting reinstatements and notifying the Multifamily Claims Branch of these transactions. The Multifamily Claims Branch in Headquarters, is responsible for computing and paying insurance benefits, holding HFA Debentures and tracking accrued interest received on debentures. The Multifamily Accounting Branch (MAB), in Headquarters, is responsible for receiving and monitoring repayments on HFA's second mortgages. 10-2 NOTICE OF DEFAULT AND FILING AN INSURANCE CLAIM. A. NOTICE OF DEFAULT 1. General - When a mortgage is in default, the HFA is required to notify Headquarters monthly until the default is cured or the HFA files an application for initial claim payment. 2. Definition of Default a. A monetary default exists when the mortgagor fails to make any payment due under the mortgage. b. A covenant default exists when the mortgagor fails to perform any other covenant under the provision of the mortgage or the regulatory agreement, which is incorporated in the mortgage. An HFA becomes eligible for insurance benefits on the basis of the covenant default only after the HFA has accelerated the debt and the owner has failed to pay the full amount due, thus converting a covenant default into a monetary default. 3. Date of Default - For the purpose of this chapter, the date of default is: a. The date of the first uncorrected failure to perform a mortgage covenant or obligation; or b. The date of the first failure to make a monthly payment that is not covered by subsequent payments, when such subsequent payments are applied to the overdue monthly payments in the order in which they were due. 4. HFA Responsibilities when a Default Occurs a. File a Notice of Default - If a default (as defined above) continues for a period of 30 calendar days, the HFA must notify the Multifamily Insurance Operations Division by submitting a Form HUD-92426, Notice of Default Status on Multifamily Housing Projects, (Appendix 19) within 10 calendar days thereafter, unless the default is cured within the 30-day period. Unless waived by the Commissioner, the HFA must submit monthly a Form HUD-92426 until the default has been cured or an application for initial claim payment is filed. b. Mortgage Acceleration - In cases of mortgage acceleration, HFA must first give notice of default. Unless already accelerated (as in a covenant default), the HFA must accelerate the debt when the owner has failed to pay the amount due. 5. Multifamily Insurance Operations Division Responsibilities when Notified of a Default Monitors Defaults. B. APPLICATION FOR INITIAL CLAIM 1. General a. If the HFA has not previously received a partial payment of claim (PPC), the HFA may file for a PPC. Otherwise, the HFA must file for an initial claim payment. b. Application for the initial claim payment or for a PPC (See Section 10-3) must be filed within 75 calendar days from the date of default or within the extended time granted by HUD. The application may be filed as early as the first day of the month following the month for the payment was missed. c. Time extension must be granted before the 75 calendar-day period expires. Additional extensions must be granted also before each deadline expires. d. Upon request, HUD may extend in writing, up to 180 calendar days, the deadline for filing a claim. The 180 days include the initial 75-day period. The deadline may be extended beyond a 180 days, not to exceed 360 calendar days from the date of default, in cases when the HFA certifies that the project owner is in the process of transacting a bond refunder, refinancing the mortgage, or changing the ownership for the purpose of curing the default and bringing the mortgage current. 2. HFA Responsibilities a. The HFA files for the initial claim payment by completing and mailing to the Multifamily Claims Branch a Form HUD-94195, Application for Initial Claim Payment (Appendix 20) and the Payment Information Form (Appendix 21). Mailing instructions are given on Form HUD- 94195. b. The HFA must request time extension(s) for filing the initial claim application by sending a letter to the U.S. Department of Housing and Urban Development Multifamily Insurance Operations Division 451 Seventh Street, SW Washington, D.C. 20410 The letter must specify the reason(s) for the extension and the date upon which the extension shall expire. c. When filing for the initial claim payment within time extensions granted by HUD, the HFA must submit a copy of the granted extensions along with Form HUD-94195 and the Payment Information Form. 3. Multifamily Insurance Operations Division Responsibilities - When requested by the HFA, the Operations Division may grant written extensions for filing for the initial claim payment. 10-3 INITIAL CLAIM PAYMENT AND BOND RETIREMENT. A. INITIAL CLAIM PAYMENT 1. General a. The initial claim amount is based on the unpaid principal balance (UPB) of the mortgage note as of the date of default, plus interest at the mortgage note rate from the date of default to the date of initial claim payment. b. In determining the mortgage note interest component of the initial claim amount, if the HFA fails to meet any of the requirements of this chapter within the specified time (including any granted extension of time) HUD shall curtail the accrual of mortgage note interest by the number of days by which the required action was late. The initial claim payment is the amount of the initial claim as prescribed in Paragraph 10-3.A.1.(a), less MIP delinquencies, late charges and interest assessed under Paragraph 9-3.D of this Handbook. 2. Multifamily Claims Branch Responsibilities a. When the Multifamily Claims Branch receives Form HUD-94195, it computes and pays the initial claim payment. b. The claim payment is wired to the Bank and Account Number listed on the Payment Information Form that the HFA has submitted. The Multifamily Claims Branch is not responsible for misdirected funds due to HFA error. B. BOND RETIREMENT 1. General - Proceeds from the initial claim payment must be used, within 30 calendar days after the date of the initial claim payment, to retire any bonds or any other financing mechanisms securing the mortgage. Any excess funds resulting from such retirement or repayment shall be returned to HUD within 30 calendar days of the retirement. 2. HFA Responsibilities - HFA retires bonds and wires excess funds to the Multifamily Claims Branch. The Form HUD-94193, Excess Funds from Redemption of Bonds Part I (Appendix 22), must be completed and sent to the Multifamily Claims Branch. Instructions for completing and sending form are stated on the form. Part II of Form HUD-94193 gives wiring instructions. C. PARTIAL PAYMENT OF CLAIM 1. GENERAL General - When a claim for a partial payment (under Paragraph 10-2.) is received, the Commissioner may make a PPC in accordance with the requirements of this section. 2. One PPC - Only one PPC may be made under a contract of insurance. 3. PPC Amount - The amount of the PPC is equal to the amount of relief provided by the HFA in the form of a reduction in principal and a reduction of delinquent interest due on the insured mortgage times the lesser of HUD's percentage of the risk of loss or 50 percent. 4. HFA Second Mortgage - Repayment of the relief provided by the HFA must be secured by a second mortgage to the HFA. a. This second mortgage may provide for postponed amortization and may not be assigned to HUD by the HFA. b. This second mortgage is not insured under this part and may not be insured under any other HUD-related insurance program. 5. Administrative Guidelines - The HFA must follow HUD's Administrative Guidelines in Handbook 4350.1, Insured Project Servicing, Chapter 14 and substitute HFA for HUD. To assist the HFA to meet these administrative requirements, HUD has developed an automated system. Please contact the Asset Management Branch Chief in the local HUD Office and request a copy of the automated process. D. HFA RESPONSIBILITIES 1. Claim for a Partial Payment - HFA submits to Multifamily Insurance Operations Division an application for PPC. 2. HFA Submission - The HFA must provide the following information with its application for a PPC: a. The amount by which the HFA will reduce the principal on the insured mortgage and the amount of delinquent interest on the insured mortgage that the HFA will defer based on the anticipated closing date; and Certify that: (1) The amount of the principal reduction of the insured first mortgage does not exceed 50 percent of the UPB; (2) The relief resulting from the PPC, when considered with other resources available to the project, are sufficient to restore the financial viability of the project; (3) The project is or can (at reasonable cost) be made structurally sound; (4) The management of the project is satisfactory; (5) The default under the insured mortgage was beyond the control of the mortgagor. b. A completed Payment Information Form (Appendix 21). 3. Closing of Second Mortgage - When the second mortgage is closed, the HFA shall notify the Multifamily Insurance Operations Division. 4. Partial Claim Repayment a. The HFA must remit to Multifamily Accounting Branch a percentage of all amounts collected on the HFA's second mortgage within 15 calendar days of receipt by the HFA.
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